Rafferty Capital Markets equity analyst Dick Bove likes the numbers for the future of housing affordability in an email to clients this morning.
"Assuming a 4.04%, 30-year fixed rate mortgage, with a 15% down payment, and a 25% payment to income index, the Rafferty Capital Markets Affordability Index is 1.74%,” he states. "This is very high relative to the long-term past.”
However, the outspoken mouthpiece for the securities brokerage service provider is not sure where the mortgage money will come from.
And he’s right to worry.
There is a housing crisis in this country, and it’s only going to get worse.
Bove recognizes this and puts some numbers around it. He writes that the annual demand for housing is about 1.5 million units per year. Homebuilders are only building just north of 1 million.
That growing demand comes from the ever expanding 45 to 64 age group, which will continue to bloom, and need homes for the next decade, at least.
So the good news is this age group can likely afford the 15% down and hold a job with a salary that fits Bove’s low debt-to-income ratio standard.
The income, therefore, isn’t the problem; it’s the debt part of the equation that is not adding up.
The bad news, again, is where will the mortgage money come from?
According to Bove, by the end of last year, the government-sponsored enterprises Fannie Mae and Freddie Mac provided 87.4% net fund flows into the mortgage market.
But there’s more. Are you sitting down?
“If one adds the direct buying by the GSEs and subtracts the net selling by ABS holders, the government accounts for 102.4% of the total market money inflows,” Bove writes. “Three of every five mortgages in the country are either owned or guaranteed by the government and this does not count the FHA or VA guaranteed loans.”
So, Bove is clearly giving an argument to recapitalize Fannie Mae and Freddie Mac. In the past, Bove scolded the Treasury action, the so-called third amendment sweep allowing the government to keep the profits from Fannie and Freddie without sharing the losses.
In light of Bove’s obvious bias, there’s no denying he has a valid point: the primary source of mortgage financing in this nation is under threat.
That threat is not only inaction but political wrong-headedness.
“This is particularly unhealthy because the GSEs are currently insolvent and they will be bankrupt by December 2017 under current regulations. This begs the question as to who or what will replace them?” he asks.
“At this moment no one knows. Thus, housing could be throttled by a lack of mortgage money in 18 months," Bove continues. "These numbers make it hard to assume that the GSEs will in fact be eliminated as currently planned. If they are it would appear that the mortgage markets would be thrown into chaos.”
The good news here, Mr. Bove, is that it would not be the first time.
The bad news is that you give me no choice but to agree with you. We’re not just running out of housing finance options, we simply aren’t left with any secondary market solutions.